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D&I in FS: senior management responsibilities and oversight

The Financial Conduct Authority (FCA) and Prudential Regulation Authority’s (PRA) recent proposals demonstrate a divergence in approach when it comes to individual accountability and expectations of senior management in driving diversity and inclusion (D&I) strategy. Whilst the risk of enforcement action against approved Senior Managers and/or firms for standalone D&I issues remains modest, the regulators’ latest proposals are likely to require Senior Managers and firms to review and amend existing policies and procedures. 

Solo regulated firms

The FCA has reaffirmed its position that overall responsibility for D&I does not need to be allocated to a specific Senior Management Function holder (Senior Manager), although it has suggested that firms may find it helpful to do so to better focus attention on D&I.

If a firm decides to allocate responsibility to a particular individual or central function, all managers retain responsibility for developing and embedding healthy cultures in their areas of responsibility.

Dual-regulated firms

In contrast, for dual-regulated firms which are in scope of the prescribed responsibilities (PRs) for culture, the PRA is proposing to extend the scope as follows so that Senior Managers can be more readily held to account for the success (or failure) of the D&I strategies they develop and implement:

  • PR I (usually held by the Chair of the Board): sets out responsibilities for leading the Board’s development of the firm’s culture. The PRA proposes that the Senior Manager holding PR I will be responsible for ensuring that the Board sets, approves and adopts an appropriate D&I strategy and would be expected to ensure all members of the Board have adequate time and opportunity to contribute to the development of the strategy and provide independent challenge.
  • PR H (usually held by the CEO): includes responsibilities for overseeing the adoption of the firm’s culture in the day-to-day management of the firm. Under the PRA proposals, the Senior Manager holding PR H will be responsible for ensuring that the strategy set by the Board is implemented across the firm and would be expected to ensure that all business areas understand the role they play in implementation. 

Whilst responsible Senior Managers will have leading roles to play according to their respective PRs and ultimately be accountable, business areas across the organisation would be expected to contribute to firm culture and the implementation of D&I strategies.

For firms that are not required to allocate PR I or PR H to Senior Managers (e.g. CRR firms with assets less than £250 million and third country branches), at least one Senior Manager will need to have responsibility for the implementation of the firm’s D&I strategy. If this individual holds an executive Senior Manager position, their D&I responsibilities should also be reflected in their performance objectives and, where applicable, variable remuneration decisions. 

Many Senior Managers will also have people-management responsibilities. In addition to any prescribed responsibility to oversee the firm’s D&I strategy, Senior Managers will need to consider their responsibilities to ensure fair treatment of staff and to embed appropriate working cultures and practices in the areas of the business for which they are responsible. 

New Senior Manager appointments

When appointing a new Senior Manager, firms will need to satisfy themselves that the individual will be able to support and embed the firm’s strategy and the regulatory expectations with regard to creating a safe and inclusive workplace. Individuals required to attend interviews with the regulators as part of the Senior Manager approval process should expect to be asked questions about this. 

Existing Senior Managers

The expansion of PRs for key Senior Managers, such as the Chair of the Board and/or CEO, would necessitate updates to the Statements of Responsibilities for these individuals to ensure that they appropriately reflect relevant responsibilities for D&I. Related to this, any expansion would also need to be carefully reflected in the relevant Senior Managers’ performance objectives and remuneration scorecard, and their performance against these reflected in remuneration decisions, via the application of risk adjustments (where these apply). 

Whilst the regulators have acknowledged that Senior Managers should not be held accountable for a firm failing to meet its D&I targets, they will be expected to demonstrate that they took ‘reasonable steps’ to implement appropriate strategies and should be able to discuss with the PRA why certain targets were selected and, if they are not going to be met, the reasons for this. 

The PRA has provided specific guidance on what it considers would constitute ‘reasonable steps’ when it comes to discharging D&I responsibilities, which includes “demonstrable efforts to implement a well-developed and evidence-based strategy, and an understanding of how a firm should address strategic shortcomings on D&I over time”. 

Enforcement risk 

Enforcement does not appear to be the impetus of the recent proposals on D&I and it seems unlikely that either regulator will look to pursue standalone D&I cases in the near future. That said, personal conduct, individual accountability and positively effecting a step-change in firm culture are key themes running through both consultations and recent public statements from both regulators. 

There is a reasonable prospect that the regulators will look at D&I issues as potential root causes for more traditional regulatory breaches, such as whether lack of diversity in part of a business led to poor risk management decisions, or “group think”. In the most egregious cases they may also consider whether to exercise supervisory intervention powers, such as requiring a skilled person review. 

The next post in this series will focus on governance considerations for firms. 


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